Tuesday Technical Update: Nice Reversal Day?

That was a nice reversal day in the equity market. More so in the futures market where Russell and Mid Cap futures reversed 2% and 1.5% respectively off the session highs into session lows while the ES closed 13 handles off the session high (4PM close, not the 4:15PM).

There are a number of chart patterns on various equity indices but the one I feel is most accurate for it touches price the most is that of the ascending wedges. In that context today not only showed how equity is tired for it simply failed to hold highs but also how it is showing false breakouts within a normally bearish pattern.

Below are two such ascending wedges on a six month daily chart. Note the relative weakness on the Mid Cap futures (unable to even touch resistance since November 9, 2011).

SPX

Mid Cap Futures

The Vix

Interesting to note the vix has slowly been creeping higher while the equity market has as well. Not something that is supposed to happen. Up over 6% today the vix is very close to resolving a descending wedge pattern which typically breaks higher.

The MOVE index the bond market’s counterpart to the vix is also registering complacent levels and could very well signal a big move lower in bond yields.

Treasury Futures

You honestly cannot get any closer to a breakout in futures than we currently have. Today the two year was within .01% of all time highs while the rest of the curve 5, 10 and 30 year futures are all within 0.5% of breaking out.

Remember they have all consolidated for over five months above prior highs so if in fact they do breakout the move will be very powerful. Bottom line there is no one sitting on a loss in treasuries right now and no overhead resistance. Below is a 6 month daily  of the two year treasury. The horizontal line at the top is the all time highs.

Currencies

Three currency charts for you today, AUD, USD and EUR. All three contrary to some beliefs are interconnected. You cannot have the USD and AUD for example continue to move higher for much longer. One has to give. In other words currency pairs do not trade in a vacuum and can only get so stretched before the other pair forces a reversal. Right now the AUD looks like the currency that will move lower and the USD higher.

AUD – Notice the downtrending channel which has contained price since July 2011. Also notice today’s failure at the 200MA and the failure to break out of the ascending wedge pattern within the overall downtrend.

USD - The USD seems to be trapped right now trying to breakout of an ascending wedge pattern which to be fair is a bearish pattern and November 2010 highs. A break higher of the 81.50 area will lead to a quick move to 83-84 which will further pressure already stretched equity markets.

EUR - Next major support comes in at 1.2584 which after multiple failures to recapture the multi month downtrend looks very feasible. Failure of that level which is not far away should lead to a quick move lower to the 1.21-.22 area. This move alone will further pressure the AUD/USD lower.

Bottom Line

Not much more to add here. The trade is still on and getting closer by the day. Multiple asset classes are literally perched right on the edge. The AUD for example could move lower causing equities to selloff and putting the final bid to push treasuries to all time highs. Treasuries could simply break to all time highs on their own causing capital to leave equities which would result in AUD moving lower.

The EUR can break lower causing USD to break higher further weakening commodities which will weaken equity. Of course the opposite of every possible scenario could also play out. Bottom line though is with so many asset classes sitting on the edge of a major breakout and or breakdown a big move is coming and soon.

Images: Flickr (licence attribution)

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